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Director pay at an Australian startup company
Updated: 7 December 2019
If you are starting up in Australia, here’s what you need to know about director pay.
First, the Corporations Act 2001 applies to Australian companies. However, it does not prescribe director's fees.
Rather, there’s a replaceable rule (non mandatory rule) about director pay - it’s in section 202A of the Corporations Act 2001 and here’s what it says:
The directors of a company are to be paid remuneration that the company determines by resolution.
The company may also pay the director’s travelling and other expenses that they may properly incur:
In attending directors meetings or any meetings of committees of directors; and
In attending any general meetings of the company
Why some startups don’t pay a director fee
We know the the obvious reason is cash - a lack of it.
But the other linked reason is that one or more directors may have contributed capital and the priority is to reimburse them first before directors fees are paid out.
How to deal with directors pay in a founders agreement
If there are multiple directors (founders), you could set up a founders agreement that deals with founder duties and give yourself some flexibility when it comes to pay.
Flexible option example
Below is a sample clause that's consistent with the replaceable rule above:
The company will first repay the personal contributions by [director name] and [director name], after the repayment, the Company board will make decisions about director pay by ordinary resolution.
No director fee example
The founders will not be paid a director’s fee..
Now this clause does not mean the director will never be paid for any of their contributions to the Company. It simply means, for holding the position of director, the director won’t be paid a fee.
Now these are early stage options to give a startup flexibility.
Unpaid forever?
Hopefully not!
The concept of non paid directorships is not that uncommon in Australia.
In fact, you’ll find not-for-profit organisations often have unpaid directorship positions. Board members may include a mix of seasoned business professionals and other members that want to get board experience.
Should director’s remain unpaid forever?
Probably not. If the director duties expand as the company grows, you may add other directors and may want to attract directors with business acumen to sit on your board by paying them!
Also, you’ll likely want to start compensating directors at some point especially if they double up as employees in the business; employees have rights under Fair Work Legislation including the fundamental right of getting paid for work.
Pay implications
Get tax advice if you are going to pay anything to anyone in your startup. Accountants can tell you all about the different tax treatment for one-off service fees and an ongoing payment.
Founders agreement vs employee agreement
I always recommend a founders agreement in the early days when the basics of duties, work location, resource contributions need to be set out in writing.
For 2 or more founders, founder's agreements are practical and are inexpensive, but you may not want to use them forever.
At some point an employment agreement will serve you well when founder roles are well defined and you want to outline the details of position and pay in a separate agreement.